UK Inflation Stays at 0.6%, But Import Prices Rise Sharply as the Pound Falls

BBC

BREXIT FALLOUT—A fall in the value of sterling since the U.K. voted to leave the European Union pushed up British firms’ raw material costs in August at the fastest annual pace in nearly half a decade, yet so far fortunately, it has yet to feed into prices for the consumer.

Driven up by the weakened pound, the cost of companies’ fuels and materials rose 7.6% in August from a year earlier, the fastest rate of growth since December 2011, the office for National Statistics said Tuesday. Import prices surged by 9.3% on the year.

Most economists, however, expect that the slide in sterling—which has lost some 10% against the dollar since the referendum—will likely fuel a sharp revival in inflation, which has been largely dormant for years.

The Bank of England also expects sterling’s decline to push inflation back to its 2% target by around the third quarter of 2017.

Combined with the uncertainty around the U.K.’s future trade arrangements, which analysts say will dampen business climate and tighten labour market conditions, this could lead to a fall in consumer spending—one of the main drivers of the British economy—hurting the U.K.’s growth prospect.

Until Theresa May triggers Article 50, the U.K.’s desire to have “talks about talks” on post-Brexit deal, is not finding favour among EU power brokers. There seems to zero political willingness on the part of the European Commission to discuss the future. There’s little incentive for the EU to be seen to be doing the U.K. a favour at a time when the European project is coming under fire from politicians in countries such as Germany, France, and Italy, not to mention Poland and Hungary.

Note: The Producer Price Index (PPI)  is a monthly survey that measures the price changes of goods bought and sold by UK manufacturers and provides an important measure of inflation, alongside other indicators such as Consumer Price Index (CPI)  and Services Producer Price Index (SPPI). This statistical bulletin contains a comprehensive selection of data on input and output index series. It contains producer price indices of materials and fuels purchased, and output of manufacturing industry by broad sector.